Taxing the rich: "Part of this complete breakfast"

The 'starve the beast' strategy works like this:

1. Cut taxes.
2. Observe that cutting taxes has produced a government deficit.
3. Cut spending to reduce the deficit.

This idea is apparently American in origin, but the US never has quite managed to get the hang of it; they keep getting bogged down at Step 2. The federal Conservatives implemented Step 1 when they cut the GST*, Step 2 was reached in the 2011 budget and they started Step 3 in the most recent budget.

The opposition parties deplore this agenda, and from the proposals that have been put forward in various elections and leadership campaigns, their strategy for restoring sustenance to the beast is to increase corporate taxes and increase taxes at the top of the income distribution.

This won't be nearly enough to close the hole left by the cuts to the GST, let alone finance new spending. Increasing corporate taxes will generate very little revenue even in the short run, and a good long-run estimate for the effect of corporate income taxes on revenues is zero. And there's little hope of generating much in the way of significant revenues from taxes on those earning more than $500,000 or even more than $250,000.

If the goal is to feed the beast, then tax increases on high earners is the fiscal equivalent of Chocolate Frosted Sugar Bombs:

 

 

A serious increase in revenues would require increasing taxes on the great mass of people, not just the tiny fringe at the top. But the only way a general increase in taxes would be politically viable is if it were viewed as being 'fair' - and that means one in which the rich are seen to pay more.

The problem occurs when the revenue generation program consists exclusively - or almost exclusively - of taxes on high earners. There are lots of people who think that top earners are an inexhaustible source of revenues, and that a social democracy can be built on the taxes produced by a fraction of a per cent of the population. These people should be disabused of that notion.

Those who want to keep the beast from starving are going to have to put something more substantial on the table than the sugar-fueled rush of taxing the rich.

 

*Yes, I know about the corporate tax cuts. The effect on the budget balance is tiny in comparison.

 

Comments

[Livio Di Matteo]

Steve:
Very timely post given that Ontario has just decided to impose a surtax on individuals earring more than 500,000 dollars.

[Determinant]

Fairness has been an issue and there are no program increases tied to or justified by this tax increase, so for once the "deficit reduction" claim has an air of reality.

[Stephen Bank]

Great post, but why put scare quotes around "fair"?

[Stephen Gordon]

Not a scare quote. It's a subjective value judgment.

[Noah Smith]

Hello, Stephen Gordon. It is time for some numbers. Observe the large fraction of income made by Americans earning more than $200,000:
http://online.wsj.com/article/SB10001424052748704621304576267113524583554.html

Now argue to me that people making 5 times the median income are not "rich". Go ahead. It has been a long time since I got to really lambast anything, and I am suffering from acute caffeine withdrawal! >:-E <--troll face

[Alan T.]

Here is one reason the starve-the-beast strategy might not work:

Bradford DeLong writes: "Buchanan and Wagner (1977) argue that deficits are dangerous because voters are highly myopic: when spending is raised and taxes are raised to finance the extra government spending, voters feel both the pain of reduced after-tax incomes and the benefits of spending programs and can judge whether the one is worth the other; but when spending is raised and financed by borrowing, voters feel the benefits from spending but do not sense the true resource cost of added indebtedness."

James Buchanan and Richard Wagner, "Democracy in deficit: The political legacy of Lord Keynes"

Bradford DeLong, "Fiscal Policy in the Shadow of the Great Depression"

[Noah Smith]

The top 10% of earners made 45% of U.S. national income in 2008. Do you call that the "great mass of people"?

HOMEWORK. FACTS. NUMBERS. Thank you.

[Stephen Bank]

"Fair" enough. But even if you assume that is true, I think you'll have a hard time convincing social democrats to take economics more seriously if you're so dismissive of their moral concerns.

[W. Peden]

Noah Smith,

Does Canada really bore you so much? Or is there a lack of debate about US finances?

[Stephen Gordon]

Noah, I suppose it`s too much to ask to be familiar with the context in which this debate is being played out in Canada. But it`s not too much to ask to assume that the debate in Canada is based on a different set of facts than is the one in the US.

[tyronen]

You keep saying that taxing the wealthy or corporations won't work because they change their behaviour to reduce the taxes they pay.

Yes, but so does everyone else. Raise the GST, and people will spend less money. Introduce a carbon tax, and people will use less energy. Raise the income tax, and the incentive to work and save takes a hit. Raise the payroll tax, and employers have a disincentive to hire. Raise tariffs, and see trade go down. Et cetera.

There is no tax, anywhere, that does not have side effects. You can never raise revenue by 10% simply by raising the headline rate by 10%.

Your spreadsheet shows that Ontario's new $500K+ tax will still raise revenue as long as the income elasticity is 0.6 or less, and it admits the best estimate is 0.25. Revenue may be less than expected, but we are still on the left side of the Laffer curve.

Why should the rich get a pass because of their side effects, but the middle class toils away under static analysis?

[Stephen Gordon]

The behavioural responses to changing the GST are much smaller, so changing the rate changes the revenues collected.

Yes, increasing tax rates at the high end will increase revenues, but the amounts involved are tiny.

I'm not saying the rich should get a pass. I'm saying we should be under no illusions about how much money you can expect to get from taxing people in the top one half of one per cent of the population.

[Cornelius]

Corporate taxes would work much better if it weren't for free capital flows. What we need is a return to Bretton Woods.

[Stephen Gordon]

Even under Bretton Woods and with 1950s-era communications and financial markets, stopping the flow of capital between Canada and the US was impractical; that's why Canada was the only country to float its exchange rate.

It's even less practical now.

[Stephen Gordon]

For some reason, this springs to mind this morning.

[Bob Smith]

Tyronen: "Your spreadsheet shows that Ontario's new $500K+ tax will still raise revenue as long as the income elasticity is 0.6 or less, and it admits the best estimate is 0.25. Revenue may be less than expected, but we are still on the left side of the Laffer curve."

A couple of clarifying points are in order. First, Milligan's analysis doesn't "admit" that an income elasticity of 0.25% is the "best" estimate of the income elasticities of the rich, it merely state that that's an income elasticity accepted by Krugman in his proposed "soak the rich" strategy (making it hard for other proponents of that strategy to quibble with that particular estimate). Estimates of the income elasticities of the rich are all over the map, but I' suggest that the elasticity relied upon by Krugman is probably closer to the bottom of the range, and my recollection is that there are credible estimates in the 0.5-0.7% range.

Second, even at Krugman's income elasticity, it's worth noting that the proposed tax increase will bring in less than half the revenue that it's proponents claim it will i.e. $254 million rather than $570 million (As an aside, it's a sad commentary on NDP policy making that, based on Kevin's analysis, even ignoring behavioural response, that estimate badly, badly, overstates the likely revenue generated by a good $168 million- seriously, would it kill the NDP to retain a couple of clever grad students to do this analysis for them?). This is an important consideration when you keep in mind that this proposal was originally linked to a series of spending/tax cut proposals (child care, welfare, and a GST cut for home heating) that would have cost $500-odd million. In effect, the original NDP proposal was to soak the rich and aggrevate the deficit to the tune of $250 million a year.

Finally, saying we're on the left side of the laffer curve is a pretty weak defense of a proposed tax increase because it only takes into account the extra government revenue and not the social cost of the behavioural response to higher taxes. The reason that the proposed tax increase will bring in less money than expected (assuming no behavioural response) is because people are either foregoing otherwise productive activities (working less, investing less) that they would otherwise engage in or because they're incurring added costs (setting up family trusts in Alberta, rather than Ontario, taking compensation in the form of stock options, or deferred compensation arrangements, rather than cash) to avoid tax that they otherwise wouldn't incur. Those are real social costs, that have to be taken into account. The top of the Laffer curve may be the revenue maximizing point, that doesn't mean it is (and if collecting that last dollar in revenue is costly, it probably isn't) the social welfare maximizing point.

[Bob Smith]

Tryonen,

And for what it's worth, I note that, in the spreadsheet, Kevin links to a paper prepared by the federal department of Finance, which both summarizes some of the existing literature on income elasticities, and attempts to estimate those elasticities for Canada for different income groups, Finance estimates the income elasticity of the top 1% (i.e., people making more than $150,000) to be between 0.62% and 0.72%.

While I'd take anything coming out of Finance with a hefty grain of salt, it's certainly plausible that the proposed tax increase will generate more or less nothing in added revenue. That that's even a possibility is a concern.

[Phil Koop]

"The problem occurs when the revenue generation program consists exclusively - or almost exclusively - of taxes on high earners."

Well then, according to your lights, no problem has occurred, since Ontario's revenue generation program does not in fact consist exclusively - or almost exclusively - or anywhere remotely close to exclusively - of taxes on higher earners. What's that you say? Changes at the margin to the revenue generation program consist almost exclusively of taxes on high earners? But then, changes at the margin on spending have fallen disproportionately on low earners. If taxing the high tail of the income distribution won't work, taxing the low tail is doubly guaranteed not to work.

[Stephen Gordon]

I'm afraid I don't understand your point.

[Patrick]

Bob, you're last point is a good one, I think. The last thing we need is added incentives for more complex financial shenanigans. If the government raises my income tax rates, I have no option other than to pay-up. Rich people, on the other hand have all sorts of options to evade taxes (e.g. buy Congress). I keep trying to convince my fellow lefties that efficient regressive taxes (e.g. consumption taxes) + progressive transfers is every bit as good as progressive taxation, but it seems that their desire to stick it to the evil rich exceeds their desire to help the deserving poor (never mind the long suffering middle class).

Sigh.

[Bob Smith]

Patrick,

On that point, I liked Kevin's comments in this morning's globe: "The assumption you have to make to get to revenue levels of like $500-million is that people who have the best tax advice available are not going to take it".

Frankly, I'm with you, despite my righ-wing tendencies, I think a modern welfare state is sustainable if coupled with a pragmatic tax policy driven by reason rather than ideology. The Ontario NDP's fixation with cutting the HST on home heating (apart from being an odd policy for a party that claims to be driven by environmental concerns) and the BC NDP's opposition to the HST is a testament to the Canadian left's suicidal willingness to torpedo the best (if not only) tax instrument to fund the spending side of their program without wrecking the Canadian economy. Until they become far more fiscally sophisticated (like their ideological counterparts in Europe), they're doomed to failure.

[Ryan]

At the end of the day, people need to realize that what they want the government to provide and what the government is actually capable of providing are two separate things. The government is not an efficient supplier of the kinds of things we have demanded of the government. Different tax regimes have been incapable of rectifying this problem. Levying a 100% tax rate on "all them rich b@stards" won't make the government a more efficient supplier.

Tax rates keep going up, government spending keeps going up, and we all keep complaining that the government should do more. What will it take for people to second-guess this notion? How many centuries does it take before a stupid idea is universally accepted as a stupid idea? Governments can't give us certain things, so we should stop asking them to do it and hanging it all on one or two demographics.

[Noah Smith]

Wait, isn't Canada a U.S. state???

What am I missing here???

[MikeB]

How about some numbers. Does anyone have recent data on Canadian income shares? Preferably with the top 10%, 1% and 0.1% broken out. It has been my experience that we don't get a good picture with quintiles alone since there is so much skew at the top. While we're looking for data, it would be great if someone had an estimation of tax burden per group (including all levels of taxation down to GST and property).

Also, GST federal. $500K+ surtax provincial. Provinces are not like Ottawa, the constraints are different. We can debate on the effects of Ottawa issuing currency, but not on the fact that they do.

Not to defend Noah, but he's been in Michigan for the last number of years, I suspect he's pretty Canada knowledgeable. I must admit though, his visit to the blog today was exceedingly strange in style.

[Kevin Milligan]

Good feedback here. A couple points.

1) Canada is not the US. About 13% of total income in the US is over 500K. In Canada it is only around 5 to 6%. So, taxing high earners in the US would yield more than twice the bounty as in Canada because their income distribution is so skewed to begin with.

2) Bob is right that I don't argue that 0.25 is the 'right' elasticity. I argue that it is the minimum bound I would accept for the reasonable range. Anything less than 0.25 is far-fetched.

3) Yes, all taxes (except for lump sum taxes, of course!) are distortionary. But some are more distortionary than others. Taxes on broad consumption are very hard to avoid, compared to taxes on high income earners. We're not stuck on a binary {distortion,no distortion} choice set here. We know more than that.

4) Bob: Thanks for the feedback on the quote "The assumption you have to make to get to revenue levels of like $500-million is that people who have the best tax advice available are not going to take it". Must admit I like that one myself (self pat pat on the back . . .)

[Tim]

Despite what has gone on BC I do have to give credit to the Federal Conservatives for pushing GST Harmonization especially with the recent news that PEI is moving to HST. PEI's PST is particularly noxious in its implementation and I suspect may start the drum roll towards HST in Manitoba.

[Kevin Milligan]

Hi Tim,

I was genuinely shocked by the PEI announcement. I figured BC's experience would salt the earth of HST transitions for generations. But maybe David D. Robertson's overview in the CTJ of how Ontario got it right and BC poli's acted like dunderheaded lummoxes is a useful guide to other provs. CTJ link.

[Bob Smith]

MikeB

Yes, GST is federal, but the federal government has been more than willing to amend its legislation to increase the provincial portion of the HST for those provinces who request it (most recently, Nova Scotia - the exception to the rule that the NDP are fiscally suicidal). Certaily, Ontario, BC and most recently PEI haven't had any trouble getting the feds to "increase" the GST in those provices by 7,8 and 9% respectively (i.e., impose HST).

And of course, constitutionally, there's nothing to prevent a province from imposing its own value-added tax, like Quebec does with the QST (Quebec is further harmonizing the QST with the GST next year - it is already mostly harmonized - but the provincial portion will still be levied under provincial legislation, rather than under the federal legislation as in the HST provinces). When it comes to GST/HST, the provinces aren't different from Ottawa, for the most part (except Quebec) they've chosen to use the GST/HST regime for the sake of administrative convenience and simplicity, not because of any legal constraints on their part.

Simply put, in Canada, there are no legal, and few practical, limitations on the rights of provinces to levy the taxes that account for the bulk of the tax revenue of most civilized jurisdictions.

[Bob Smith]

"PEI's PST is particularly noxious in its implementation and I suspect may start the drum roll towards HST in Manitoba."

I've heard that. I've been baffled that it took PEI this long given the potential for administrative savings and what I suspect is a high degree of non-compliance in the internet era.

Maybe British Columbians are just nuts! :)

[Kevin Milligan]

"Maybe British Columbians are just nuts! :)"

I see some evidence in favour of that proposition.

[Robillard]

Don't blame me. I voted to keep HST in BC. If we can blame anyone, can we please blame Bill Vander Zalm?

The main problem in BC was that the BC Liberals said that they would not pursue harmonisation (stupidly), then flip-flopped. Also, the electorate seems to have grown tired of the BC Liberal. Maybe we need a few years of NDP rule to remind us why we voted them out in the first place.

[MikeB]

I think you missed by point Bob. The federal government does not need our tax dollars before it spends because it is the issuer. The provinces are users. The rules and results are different.

[Stephen Gordon]

Oh god. No, we are NOT having a MMT debate in this thread. Don't even think about it.

[MikeB]

Promise not to go there Stephen. I'll take back the which comes first part. Hopefully the rest is not controversial. I believe Nick and Krugman have both commented about the differences of being currency issuers wrt Europe.

[Determinant]

I am a member of the NDP (there is only one membership, federal party and provincial party go together, you can't have one and not the other) and I think the HST on home heating idea is silly. Just increase the HST credit instead, at least it has a much better chance of going to people who actually need it.

On a federal level (since the Income Tax Act is federal, let us not discuss Quebec's special peculiarities) I am fully in support of fully enacting the Fiscal Nullity Doctrine into law, it's a great way to prevent abusive avoidance. Worldwide liability for income tax with Canadian citizenship too. Easy enough to rework the Canada/US Tax treaty as we would both use the same liability concept.

Stephen, the NDP are not fiscally suicidal, their track record when actually in government is the best of all parties in fact. It's just VAT style taxes play very poorly in Canada and always have. But that's politics and therefore sales, that is the art of convincing or the lack thereof.

Further, the Ontario NDP is an opposition party. Recent federal experience shows that opposition parties get appetizers when asking for budget changes, not wholesale main course differences. I am surprised that the Ontario Liberals even consented to a tax increase at all. It was a major concession as far as minority budget negotiations go and likely as much as could be expected.

[MikeB]

Stephen: You and the other authors offer your time to generate this interesting content for us and even respond to some of our primitive comments. Thanks and sorry for straying.

I reread your post again and I can appreciate what you are saying about considering the source of revenue. I'm not sure if you have an underlying view of the revenue sources you prefer, but if you do - you didn't push it in this post.

The trouble for a non economist like myself is the wide range of opinion as to what the best course of action is. It seems that even the experts can't agree on how much revenue will be generated by this recent proposed surtax in Ontario. Perhaps it is not knowable with any amount of certainty.

Step 3 of your list above says cut spending to reduce deficit. It seems to me that many countries are trying this now and the deficits are not going away. Can we really make deficits go away if we cut spending or increase taxes? Are they both a similar drag on the economy? Again, I'm not an expert, but it seems to me they both take money out of the economy. Correct me if I am wrong.

[Kevin Milligan]

"It seems that even the experts can't agree on how much revenue will be generated by this recent proposed surtax in Ontario. "

For the Topp proposal, they came up with $3B. I said more like $1.5B. Even taking their number, that is about a 1% increase in federal revenues. Enough to pay for about 1 or 2 years' worth of OAS increases. That's it. Even their own numbers show that the revenue isn't really substantial.

As for 'experts' disagreeing, I think you have a broader set of people in mind that you classify as 'experts' than I do, perhaps. I see disagreement between economists and political marketers, but not so much within the set of economists.

[Bob Smith]

MikeB

To second Kevin's point, I think you have to be careful discussing the degree of disagreement among experts. I think it's safe to say that there is no respectable economist (or tax expert more broadly) who believes that high income earners don't change their behaviour in response to changes in tax rates. To that extent there is likely to be no expert disagreement with the proposition that the NDP (and Liberals) revenue estimates are nonsense - suitable only for politicians.

However, while no expert would disagree with the proposition that people change their behaviour in response to changes in tax rates, there is significant disagreement about the magnitude of that behavioural response. At one end, you might have someone like Krugman who thinks its relatively low - though even at the low elasticity Krugman uses, tax revenue is half what the NDP and Liberals think it will be. And as I noted, others have found estimates of elasticity that are significantly higher.

However, while there may be disagreement, we can still draw informed conclusions from those experts. While it may be the case that we can't know with certainty what the revenue will be, we can rule out the possibility that it'll bring in $570 million dollars. That's useful information - if only because it allows us to dismiss anyone making such claims as a charlatan (and so we don't go planning on spending revenue we won't get) Also, a priori, we can't rule out the possibility that it'll bring in no net revenue (or even negative revenue). Again, that's useful information, since that'll be something we should look out for once this proposal is implemented - and it also suggests we should have an open mind about repealing this tax in the event it turns out to be a money loser.

[Tim]

Determinant:
I take issue with comment about worldwide taxation for Canadian citizenship. In fact the NDP has already come out vehemently against the "concept." There are HUGE tax problems right with US Citizens living in Canada many of which do not know they are US citizens due to something called FATCA and FBAR. In fact I have been posting regularly at another web called the Isaac Brock Society that is devoted to this issue. I am actually going to have some of the regulars over their come over here now that the subject has been brought up. As I linked to below the NDP actually has an official policy determined by caucus of opposing the US policy of trying to tax US Citizens living in Canada with no residential ties to the US on their Canadian source income. I also believe the entire BC NDP federal caucus sent a letter to Flaherty opposing the US' effort to try to impose tax and reporting requirements on its citizens living in Canada. As someone who generally doesn't support the NDP there efforts on this issue have caused me to look at them a whole new light.

http://denisesavoie.ca/ndp-position-on-the-us-foreign-account-tax-compliance-act-fatca

http://jeancrowder.ndp.ca/post/jeans-column-on-the-u-s-foreign-account-tax-compliance-act-fatca-for-the-cowichan-valley-citizen-september-2011

All of Canada tax treaties with countries other than the US(about of 80 or so based on the OECD model)prohibit taxation of non resident citizens. Dual US Canadian citizens are the ones being treated unfairly by past Canadian government that refused to standup to the US in past treaty negotiations. Sorry for going on about this but I don't think there has ever in my life been an issue I am so hot under the collar about it.

[Determinant]

The US gives tax credits for taxes paid in Canada under the Canada/US tax treaty.

http://www.uscanadataxexperts.com/dbltax.php

As demonstrated above, even though I am a card-carrying member of the NDP I don't always agree with party positions.

In most cases dual citizens would owe little to no tax.

The US has imposed income taxes based on citizenship since the 1920's. This is not new, I cannot see that any representation by Canada would persuade the US Congress to change a fundamental assumption of the US income tax system. But they did give Canadians credit for taxes paid here under the Tax Treaty.

While US tax law is a pain sometimes, dual citizens always had US income tax liability. Recent acts just made that far more clear to many people. Americans living in Canada, unlike most other countries, are by an large low to middle income.

[Tim]

Determinant:

Yes but the filing and preparation costs can be into the thousands for someone with only middle income. The issues is isn't tax per say(Canadian rates are higher than the US so there is almost never any tax due) is the filing and preparation requirements and the PENALTIES for not doing it correctly. For a US Citizen living in Canada ALL Canadian financial accounts are considered "offshore" even though the person lives in Canada thus the account balances all have to reported on two separate forms once to the IRS and once to the US Treasury(the penalty for a willful error is 50% of the balance each with statute of limitations going back six years). The other issue is the US IRS is trying to compel Canadian financial institutions to report information on dual citizens clients in violation of the Bank Act, PIPEDA, the Canadian Human Rights Act and god knows what else.

The other issue is the US retroactively restored citizenship to many American who came over to Canada in 1970s and "reliquinshed" their US citizenship under the laws of the day when they became Canadian citizens. Elizabeth May I believe is in this group. Additionally not surprising given that many Americans who came to Canada in the 1970s did so for "political" reasons because of the Vietnam War once becoming Canadian they often became life long NDP supporters(which could possibly be skewing the party's position on the issue).

[Tim]

NDP MP Denise Savoie of BC actually sent a letter to Obama calling on the US to change its laws on this issue.

http://denisesavoie.ca/download/1467/letter_to_president_obama.pdf

[MikeB]

Prof Milligan: My comment about various opinions was mostly based on a recent exchange between yourself and Erin Weir at PEF. Having read the full list of comments, it looks like there is less disagreement on the static estimates. BTW IMO quite a civil discussion between you two. Perhaps it is as Bob Smith says: it is about the elasticity estimate and behavior. It seems from your CV that you are well qualified from that point of view. In terms of resources, I do try and stay away from the media and political press releases. For my Canadian content, I typically come here or PEF. On the US/Intl side I do try to stick with academic based blogs. I know I should read the academic stuff, but I'm too old to do another degree. It seems to me that taxing income is not necessarily the best or easiest way for us to tax. If you were to build something from the ground up in 2012 - what would it look like?

[MikeB]

Bob:

As I mentioned above, I think it is the behavioral component that I was referring to with the broad range. WRT to possible repeal, I'm all for agility in the tax code - not sure our politicians are though;)

[Determinant]

@Tim:

Unfortunately the US can compel institutions with US branches. That's plain power. It sucks, but it has that power.

On the other hand, Canada has done the same thing, we call people who inadvertently lost citizenship through more restrictive provisions of the Citizenship Act "Lost Canadians".

[Tim]

@Determinant

All I can is watch this channel. I suspect it will be an issue we will be hearing about more. One problem from what understand is the US wants Canadian banks with branches in the US to ask all of their Canadian customers for their place of birth. For those born in the US then have to provide a Certificate of Loss of Nationality from the US State Department for their information not to be reported to the US. The problem is very few people who lost their US citizenship in the past(i.e. 1970s) in favor of becoming Canadian have these(Elizabeth May is in this category from what I have heard her say publically. An NDP MP from Toronto is also effected). Several people have personal talked in this situation who became Canadian Citizens in the 1970s went on to multi decade high level careers in the Ontario and Federal civil service and one in particular held diplomatic rank in Canadian Embassy in Europe and worked in a "policy level" position in the BC Premier's office under Mike Harcourt. These are not "acts" under international law that are generally thought of as indications of ones intention to remain a US citizen. I have been told secondhand cases of people who went to work for the Bank of Canada or went into the Canadian Forces who again were born in the US but can't show proof to the IRS of losing US citizenship.

I don't believe it was the intention of the US to do this but they because they only have an income tax(No GST) they are desperate to crackdown on offshore tax evasion but instead are snaring a lot of people they shouldn't be.

[p33t]

And don't forget - US is in a very small club of countries, with only Eritrea and North Korea, who tax citizens wherever they live. The rest of us are taxed by the country in which we reside regardless of where we hold citizenship. The US government has very clusily tried to clamp down on rich US citizens hiding their money abroad by punishing all overseas US (accidental or otherwise) citizens. This is exacerbated by the US insisting that the rest of the world must pay for and execute US tax policy.

[Bob Smith]

I also have serious doubts about whether citizenship based taxation really results in a significantly broader tax base than residency based taxation. The latter set of rules would tax those citizens who are ordinarily resident in the US, while the former would not (effectively) tax those who are ordinarily resident in other high tax jurisdictions (Canada, the EU, etc.).

So the only group who might generate significant revenue would be US citizens who are ordinarily resident in low-tax jurisdictions and I'd suggest to you (a) that those numbers are relatively small and (b) the actual ability to tax those citizens under citizenship based rules is pretty minimal.

On the first point, US citizens working abroad on a "temporary" (understood as being a potentially long time, so long as there is an intention to return to the US) would likely be taxed in a residency based system (it is exceedingly difficult, for example, to cease to be a resident of Canada and it typically triggers an exit tax liability). And let's face it, moving permanently to the Caymen Islands or Mauritius is a damned difficult way to avoid taxes. Sure, they're nice, but they're not Paris, London, New York, Los Angeles. Leaving your family, friends and connections in the US to live out the rest of your life in the tropics is not a particularly attractive option to your typical tax evader - in practice, they try to hide their money abroad while continuing to live in the US.

And on the second point, if someone is willing to permanently leave the US simply to avoid taxes, under a residency based regime, any bets on their willingness to actually comply with US tax law when they're out of the country under a citizenship based regime?

[Frances Woolley]

This is interesting from the Center on Budget and Policy Priorities on the real impacts of rising taxes on high income earners.

[Stephen Gordon]

Heh. Its subtitle is a restatement of the title of this post. And is $60b - 0.4% of GDP - really 'significant'?

[Bob Smith]

Frances, I can't help but think that the CBPP seems to fall within the catagory that Kevin described as "political marketers".

While the underlying research on which they rely (particularly the upcoming Saez, Slemrod and Giertz (SSG) paper) is unimpeachable, the CBPP paper draws a number of conclusions that simply aren't supported by that research.

For example, in the opening paragraph, the state that "The literature [meaning the SSG paper - though that's a pretty selective reading of the literature] suggests that if the alternative to raising taxes is larger deficits, then modest tax increases on high-income households would likely be more beneficial for the economy over the long run." But, the SSG paper doesn't "suggest" anything of a sort - it doesn't use the word "deficit" or make any comments about the merits of tax increases. At most, it can be relied on for the proposition that the real costs of tax increases are overstated (although I note it does not, and doesn't puport to, estimate the real costs associated with implementing" tax avoidance" strategies). Everything beyond that is the CBPP's spin.

Or consider a second example, the CPBB states that "policymakers CAN limit high income taxpayers’ ability to respond to increases in tax rates by engaging in tax avoidance activity — and also enhance the efficiency of the tax code — by broadening the tax base" (emphasis added]. Maybe, but here's what the SSG paper actually said: "In that context, broadening the tax base and eliminating avoidance opportunities such as to reduce the elasticity is LIKELY to be more ecient and more equitable than altering tax rates within the old system" (emphasis added). The CBPP has taken what was is a fair, but speculative, comment in the SSG paper, and converted into it into a definitive statement.

I don't mean to be hard on the CPBB, think tanks of political varieties engage in these sorts of exercises (and some are worse than others). I'm not even convinced that the intention is to mislead, as much as anything else it may just be a sloppy use of language. For example, in the same paragraph the CBPP says "[w]hile [tax avoidance] strategies entail some economic costs, these costs ARE relatively modest" (emphasis added), but in their appendix they cite a Chetty paper for the proposition that "while avoidance has an economic cost of its own, it MAY be more modest than if the entire ETI were explained by “real” changes to work, savings, and other economic behavior" (emphasis added). Again, they've taken a fairly unobjectionable, but speculative and uncertain, statement by an economist, and converted it into a definitive conclusion. I suspect someone just wanted to "punch up" their introductory portion (i.e., the part that journalists and policy makers might read), without thinking too hard about the fact that what they're saying isn't supported by the evidence they cite later in the paper.

MikeB, if you want to tell the difference between an expert and a political marker, look for definitive conclusions about controversial subjects, that's usually a dead give-away for the latter.

[J.V. Dubois]

Frances: Actually those results from the paper seem logical to me. I have always doubted that increasing tax rate for the rich has high real impact (such as adverse impact on labor supply). Such assumption runs contrary to result of behavioral economists. The results overwhelmingly show, that financial incentives can even have adverse impact on the performance of people engaged in creative activity. What (more money) is good at - is motivating people to do manual and repetitive and bore-some work. Financial motivation narrow's ones focus which means increased concentration on any given specific task. However it does not help at all with inventing new things. That is one of the reason why the wealth of artists is not a very good predictor about the quality of his work, while being in a stimulative environment can be. So one would predict that lowering taxes for low-skilled (and probably poor) people can have positive impact on their willingnes to work, while this effect diminishes with rising level of income. At the top level income is not as important as is the nature of the work (is it challenging, new, interesting), how your job is seen by other people (it's status) and other non-financial factors.

[Mark]

"And is $60b - 0.4% of GDP - really 'significant'?"

In the Ontario context of a 2.3% of GDP deficit, it's definitely part of a balanced breakfast.

[Bob Smith]

Mark,

I think Stephen was referring to the revenue estimate in the CBPP paper. $60B relative to US GDP. 0.4% is nothing to sneeze at, sure, but given that the US is running a deficit that's roughly 8.5-9% of GDP, a tax increase that brings in an extra 0.4% of GDP really doesn't start to address their problems. At best it means that the massive spending cuts, or new value-added tax, that the US will need to balance their budget can be 5% lower than it would otherwise need to be.

The Ontario government's new tax, assuming it'll bring in $250 million (which may be an optimistic estimate) would be something along the lines of 0.042% of GDP ($250m/$600B) - i.e., a rounding error.

[Tim]

Bob Smith:

Becoming a non tax resident of Canada is not as difficult as one might think however, you do really have to no longer live in Canada(One spouse can't stay behind while the other works on a temporary contract in the Middle East for example). As such the vast majority of Canadian citizens living outside of Canada are NOT tax resident. Where it gets kind of interesting I suppose is when "young" Canadian citizens become tax non residents working outside the country and then come back to Canada and enter the political and government arena. I am thinking of Michael Ignatieff or Mark Carney(or perhaps even Laureen Harper and several backbench MP's of all parties). However, I have never heard from anyone that the aforementioned were some how avoiding taxes. Carney and Ignatieff in particular lived and worked in very high tax countries(UK and US)Iggy's problem is he had been out of Canada for so long.

In countries where Canada has a tax treaty the CRA specifically discourages "dual tax residency" and actually tries to negotiate with the other country(except in the case of US Citizens)what country should the person in question based on their circumstances pay tax to.

[Bob Smith]

"Becoming a non tax resident of Canada is not as difficult as one might think however, you do really have to no longer live in Canada."

You're right that, technically, it's easy to do, sell the house, give up the drivers license and health card (how many "non-resident" Canadians living in the US haven't done that I wonder?), close the bank account. I was thinking more about practically. It's hard to move away from your friends, family, social connections etc. It's one thing if you're offered a great job in a country like the UK, Japan, the US, etc. where you have all the other ameneties of civilization (but you can't really avoid tax). That's a transition you can see. It's another altogether if you're moving to some tax haven in the caribean for the sole purpose of avoiding your tax liability. In practice, I don't think the effective tax base (after taking into account foreign tax credits) between citizenship based taxation and residency based taxation is all that material.

[Mark]

Bob,

I disagree and would say that reducing the U.S. deficit from 9% to 8.5% is a decent start. It is a key, yet small, part of the "complete breakfast". At least Occupy wouldn't be a distraction anymore and we can move forward and get to the grapefruit.

It would be cool to see a post of SG's comprehensive policy prescriptions. Maybe he has in the past and I've missed it. As I read it SG would like corp taxes to go down significantly, consumption taxes to go up and transfers to the poor to go up. I don't think this mix is wise politically or economically.

[Stephen Gordon]

After the latest round of cuts, cutting corp taxes isn't a great priority of mine. But I'd be fascinated to hear what's wrong with the rest of that agenda.

[Tim]

Bob Smith:

In terms of places such as the Carribean "tax havens" there are cases I have heard of people moving down there and then "commuting" back to Toronto by Air Canada while being tax "non resident"(Air Canada pilots who get free "transportation" seem to do this a lot). However, it is pretty primitive lifestyle. For one thing many tax havens aren't really tax free its just their tax systems uses indirect taxes such as import duties vs. direct taxes such as GST and income. Thus the cost of consumer goods in the Cayman Islands or Bermuda is through the roof never minding transportation charges.

What you are seeing a lot since the financial crisis are the Mark Carney and Michael Ignatieff types who left Canada after college or even before for the bright lights of New York, London, and Silicon Valley coming "back" in pretty significant numbers. I suspect in past years many of these high achievers would have stayed in places like New York, Paris, and London for the rest of their lives.

Overall there is no revenue gain from citizenship based taxation it is stupid system that only the US seems to be attracted to in some notion of fairness just the like the US insists on using state based PST's instead of a national based GST/HST system.

I think the health card issue especially among Canadians in the US is real and something the provinces need to crack down on. I suspect it is a far less problem among Canadians in other countries with universal health care systems.

[Bob Smith]

Mark,

If a surtax on the wealthy was part of grand compromise to introduce a VAT, cut spending, etc., hey, it's small price to pay to break the gordion knot (as opposed to the Stephen Gordon knot) of US politics. In isolation, it's just tossing the Astors overboard to try to save the Titanic.

Stephen: "After the latest round of cuts, cutting corp taxes isn't a great priority of mine"

Agreed, but it might make sense for the US (or not, theirs being a large open economy).

[MikeB]

I've been a little sloppy the last few days. Please replace all instances of Stephen in my comments with Prof Gordon.
-Michael

[Stephen Gordon]

No, that's fine. Unless you're actually a Laval student, I don't really expect the honorific.

[RN]

This argument not to tax the rich because "it won't solve the problem" is pure unadulterated garbage.

Taxation should be about burden. Figure out what you need government to do, pay for it fairly, based on rough equivalent burdens on people with different incomes. Someone making 10 million dollars a year can just as easily endure the burden of an 80% tax rate as a person who makes $40,000 can endure a 20% rate.

All you apologists for the rich are morally reprehensible since you benefit as much from the thriving society and economy a good government brings as anyone.

[Stephen Gordon]

Take a deep breath and re-read the post and the comments.

Do you see anyone arguing against raising taxes on high earners?

[Bob Smith]

"Taxation should be about burden".
"Taxation should be about burden"

See, I can't accept that proposition. Taxation should be about raising revenue. Ideally, it should be about raising your revenue with as little burden as possible. An 80% tax rate on Richie Rich may impose a similar "burden" (a curiously ambiguous concept) on him as a 20% tax rate on Joe Q. Lunchbox, but it'll probably bring in a heck of a lot less revenue than, say, a 50% tax. Since that revenue goes to fund programs than generally benefit the Joes of the world, imposing an 80% tax rate isn't an obvious winner for anyone.

"All you apologists for the rich..."

Well, I suppose if Frances can be a Republican man, I can be an apologist for the rich I'm not quite sure what the rich have to apologize for (being rich isn't a sin), or why I'd be apologizing for it, but there you go.

[Nick Rowe]

"....based on rough equivalent [tax] burdens on people with different incomes."

Actually, as an apologist for the rich, I think that basis for taxation would place too great a burden on the poor. I would prefer a tax system that placed a zero (actually negative) burden on the very poorest.